Money

Josh’s Debt Story (Part 2): Only Finance One Large Purchase at a Time

I was able to repay $77,000 of debt in 5 years through three financial actions: extra monthly loan payments, only finance one large purchase at a time, and saving for the future. In this part of my debt story, we are going to talk about the second financial success tip. Only making one large purchase at a time.

Loan Payments are a Big Monthly Expense

If you are currently in debt, one of your largest monthly expenses is loan payments. When I first graduated college, my student loan payments were almost as high as the rent for my one bedroom apartment. Plus I still had groceries, the internet, car insurance, and a cell phone bill to pay.

When I moved into my first apartment, my belongings (most of which was furniture my parents and grandparents no longer wanted & I got for free) all fit into a small truck & I had a high-mileage car. Nine years later, most of those belongings have been replaced and I have swapped vehicles twice since then. It took money to buy new furniture, a new car, better clothes, and buying plane tickets to spend a week’s vacation on the other side of the country.

It took several years to upgrade my lifestyle because I didn’t have the money to buy everything at once. If I had, I wouldn’t be able to afford the payments and would have most likely defaulted on my loans and still paying off the original $77,000 I had borrowed.

Success Tip #1: Only Finance One Large Purchase at a Time

In addition to my student loans, I also borrowed $27,000 to buy a brand-new sports car. I had wanted to buy this car sooner, but, I didn’t feel comfortable taking on another loan payment when I still had my student loans to repay. Yes, I could have afforded the monthly payment, but, if I lost my job or another large expense, I would have struggled to pay my bills for more than a few months because I voluntarily overextended myself financially.

Thankfully, I had a reliable car during this time frame and only had normal wear & tear expenses, so I didn’t have to borrow money prematurely. So I waited to pay off my student loans before buying my dream car.

This is because I was already used to having a portion of my paycheck go to a loan payment & by waiting to finance one purchase at a time, I didn’t have to pull from my other budget categories like saving for retirement or my vacation fund to afford the car payment. Instead, my monthly loan payment went from the student loan companies to my credit union that issued the loan.

Waiting to Make Large Purchases Prevents Economic Calamity

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Because none of us have a crystal ball to accurately predict the future, only making one large purchase at a time is one of the wisest ways to protect yourself from potential economic calamity in the future. I graduated college just as the Great Recession was starting to ramp up as the housing market plummeted.

All over the country, families with large monthly loan payments suddenly found themselves without a job as companies downsized or went out of business. Many of families took on large amounts of credit card debt as they tried to buy more time to find the money to make the normal bill payments and damaged their credit in the process or they sold at a loss to make ends meet.

I didn’t want to be in this same financial boat so that is why I waited to borrow more money. Since my current car ran just fine, it wasn’t worth the financial risk just to have a newer car. It’s not like the auto companies were going to suddenly stop making cars and I couldn’t buy one after the year 2010.

If you need to make several large purchases…

If I really needed or wanted to, I could have borrowed a smaller amount of money and not risked overextending myself. Or, I could have quit making the extra student loan payments and used that amount to pay the auto loan instead for the next few years. But, since an auto loan typically has a lower interest rate than student loans, it would have meant more interest paid.

If you need to make several large purchases, try to keep your purchase amounts as low as possible. This doesn’t mean buying something that will break in a year because it is the bad kind of cheap (chinsy) as that can be more expensive than spending just a little bit more initially to buy a quality product.

For example, if you buy a new car & your other one breaks down, you might decide to buy a slightly used model or buying a Chevy instead of a Lexus to have a lower purchase price. It’s still a great car but not as fancy as the one you would normally buy. A smaller purchase price means a lower monthly payment & less accrued interest and more money in your wallet to be used for future expenses.

How to only finance one large purchase at a time

The easiest way to only make one purchase at a time is to only have one loan at once and use cash to buy anything you might need. If you need to borrow money to buy a new living room furniture set but are only in year two of a 3-year auto loan, you will need to wait until the car is paid for or find furniture that you can buy with cash.

This will help ensure you spend less than you earn (i.e. live within your means) and allow you to repay your existing loans ahead of schedule and the money you save in extra interest payments can be a “down payment” for your future purchases.

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